NIGERIA - SAO TOME JDZ: EXXONMOBIL BIDS BLOCK 1

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000704

SIPDIS

E.O. 12958: DECL: 03/31/2014
TAGS: EPET EINV PGOV PREL ECON NI
SUBJECT: NIGERIA - SAO TOME JDZ: EXXONMOBIL BIDS BLOCK 1

REF: LAGOS 82

Classified By: J. GREGOIRE FOR REASONS 1.5 (B) (D) AND (E)


1. (C) SUMMARY: ExxonMobil has exercised only one of its
preferential bids for crude oil exploration and development
in the Nigeria - Sao Tome and Principe Joint Development Zone
(JDZ). ExxonMobil matched ChevronTexaco's bid on Block 1,
leaving the Joint Development Authority to determine the
final number of stakeholders for what is considered the JDZ's
most valuable block and which company will become the
operator. Chrome Energy is in the process of exercising its
preferential bids. Meanwhile, an ExxonMobil official
cautioned that the Government of Sao Tome may not be prepared
to deal with the complexities of modern oil development. END
SUMMARY.

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EXXONMOBIL'S PREFERENTIAL BID FOR BLOCK 1
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2. (U) On or about February 20, 2004, ExxonMobil exercised
its preferential bid for crude oil exploration and
development rights in the Nigeria - Sao Tome and Principe
Joint Development Zone (reftel). ExxonMobil and Chrome
Energy were allowed preferential bids based on exploration
work the companies had done under separate agreements with
the Democratic Republic of Sao Tome and Principe (DRSTP)
before it entered into a joint development treaty with
Nigeria in 2001. The Joint Development Authority (JDA)
administering and regulating the zone ended a licensing round
in October 2003 for nine blocks within the JDZ, by which time
20 companies had submitted bids for eight of the blocks. The
bids included signature bonuses due when awards are
announced. ExxonMobil was then allowed to exercise its
preferential right, and Chrome will follow suit. ExxonMobil
was given a preferential right to shares in any three blocks
within the JDZ equaling no more than 40 percent, 25 percent,
and 25 percent of the equity, respectively. The company had
to match the highest bonus offered in the licensing round for
the blocks it sought, but the percentage it will pay of the
associated bonus will equal its share of a block.


3. (C) Mary Feeley, ExxonMobil's General Manager for
Exploration, confirmed to ECONOFF on March 11 that the
company had matched ChevronTexaco's signature bonus of $123
million for Block 1. Feeley also said that ExxonMobil did
not exercise its right to bid on two additional blocks. She
suggested that ExxonMobil chose to focus its resources and
efforts on Block 1, considered the most valuable of this
licensing round, because of the number of surprisingly high
bids submitted and the relative uncertainty regarding actual
deposits and potential development and production costs in
the JDZ.

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WHO WILL JOIN IT?
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4. (C) Feeley said the JDA will soon consider the other bids
for Block 1. ChevronTexaco's $123 million bid should have
placed it in a position to take a majority share in the block
and thus become operator. But a surprisingly high bid of
over $100 million by Nigeria's Consolidated Oil (Conoil) may
cause the JDA to divide the remaining stake in Block 1
between the two companies, in effect making ExxonMobil the
majority stakeholder and operator if it is granted 40 percent
equity. Conoil's financial capability is suspect, according
to Feeley; she had heard, however, that Conoil has partnered
with Norway's Statoil on the bid, which may ease JDA fears of
Conoil's ability to participate effectively in development of
the block. Feeley said ExxonMobil is not concerned about it
or Chevron acting as operator. She said either company will
lead the project effectively and the two companies will work
well together via operating and technical committees formed
to administer joint projects.

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AMATEURS IN SAO TOME
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5. (C) When asked how well the Government of Sao Tome and
Principe is handling its entry into the world of oil
producing states, Feeley cautiously opined that many people
in the DRSTP involved in the JDZ and domestic oil sector are
amateurish in their approach and expectations. For example,
some government officials still cling to expectations of
rapid wealth accumulation by the DRSTP once the JDZ bids are
finalized. She said this expectation persists regardless of
how often and carefully she and other corporate
representatives explain that, under the production sharing
contracts (PSC) that will govern the licenses, the
Governments of Nigeria and the DRSTP will not receive revenue
from oil production until five to ten years after first-oil.


6. (U) Under a PSC, a private oil company bears the total
cost of developing a project, such as drilling wells,
installing well heads, building piping and platforms, and in
the case of deep offshore projects, bringing in floating
production, storage and offloading vessels (FPSO). Once
production begins and oil is pumped and sold, the company
shares revenue from crude production with a government entity
only after the company has recouped its development costs.
After the initial period of producing "cost oil" from which
the company keeps all revenue (but on which it pays taxes),
the company and the government split the revenue from the
production of "profit oil." Usually the profit oil ratio is
very favorable to the company in the early stages of
production, but the ratio inverts steeply over time as
production markers are reached.


7. (C) For example, Feeley disclosed that ExxonMobil
negotiated an initial 80/20 split of profit oil with the
Nigerian National Petroleum Corporation (NNPC) in 1993 for
the Erha offshore project in Block 209, with ExxonMobil
receiving 80 percent. That ratio will shift to 70/30 after
production reaches 350 million barrels. As production
increases, the ratio will shift further to the advantage of
NNPC increasingly fast.


8. (C) Feeley said the typical cost of developing a deepwater
project at 2,000 to 3,000 meters, the water depth of portions
of the JDZ (the water depth of Block 1 is approximately 1500
meters),is two to three billion dollars. She estimated that
the JDA and the two constituent countries will not see
revenue from the JDZ, other than the initial bonus payment
and ongoing taxes, for a period of five to ten years after
first-oil is marketed.

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JUST WHO ARE THE OTHER PLAYERS?
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9. (C) Feeley also reiterated a concern voiced by other
companies involved in the JDZ licensing round, including the
JDA (reftel),that the qualifications and credibility of the
bidders other than the international oil companies (IOC) are
questionable, and their intent to develop the blocs as soon
as possible is suspect. Following ExxonMobil's preferential
bid, the JDA will give Chrome Energy its opportunity to
exercise preferential bids on six blocs, for shares of 15 to
30 percent. After Chrome's bids are submitted, the JDA will
assess all bids in this round and award contracts in all
blocks.

HINSON-JONES